Regulation is synonymous with pensions, but the recent IORP II directive took this to the next level. The clear consensus among employers was that the associated administrative and governance requirements for all pension schemes, regardless of size, were onerous, complex and largely unworkable.
As a result, many simply moved their occupational schemes into master trusts. By joining what is essentially a group pension scheme, this offered not only a relief from the “mammoth” amount of work involved in compliance but also the avoidance of the heavy financial burden the IORP II ultimately placed on employers, says Shane O’Farrell, director of workplace markets, employer solutions at Irish Life.
“Even just appointing the key function holders and a professional trustee was likely to cost somewhere in the tens of thousands of euro annually,” says O’Farrell. “So, for many small or medium-sized plans, the financial outlay in isolation meant remaining stand-alone was an unviable or impractical option.”
Essentially, a master trust is a large defined contribution pension arrangement, which allows multiple employers to participate under the same shared arrangement. Companies who join a master trust benefit from the economies of scale and other perks associated with being part of a larger entity.
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The major benefit of master trusts is that their nature and size mean the IORP II regulations can be met centrally, by the master trust trustees, O’Farrell explains. “By joining a master trust, employers are essentially placing the responsibility for delivering the new requirements to the master trust and its trustees,” he says. “They can feel reassured that they are placing their plan in good hands because the scale and structure of master trusts mean they are well positioned to evolve over time and meet new industry challenges in the future. And the significant costs of IORP II compliance have been absorbed more easily than they might be in a standard workplace plan.”
Choosing to join a master trust does not mean reneging control of your employees’ pension, however. According to Lorna White, knowledge and governance leader at Mercer, within a master trust each employer has its own unique section where they retain full control over plan design.
“One perceived disadvantage to using a master trust can be a concern about a lack of control or flexibility at an employer level,” she says. “However, the reality is that each employer has its own section in the master trust, allowing them to maintain full control over important aspects such as benefit design.” In addition, some employers are choosing to put in place a “governance committee” internally to work alongside the master trust provider and input into decisions relating to their section of the master trust.
O’Farrell points out, however, that there are some limitations as to how bespoke the offering can be for each participating company. “For example, rebranding master trust fund names is not an option as it may be in certain standard workplace pension plans.” It may also be a culture shock for plan sponsors who have historically been very involved in championing their plan, he adds. “It may be hard to simply step back and hand over control, even in this case when putting it in the hands of a team of experts.”
White agrees that master trusts provide many advantages to employers and members and these advantages have resulted in their increased popularity in recent years. “They are professionally run pension schemes, and this is a key benefit to many employers with confidence in the trustees’ ability to meet all the appropriate governance requirements. The cost and time saving for employers who no longer must meet these requirements can be substantial and often allows employers to focus on their key priorities, perhaps boosting plan membership and enhancing pension education.”
Indeed, another advantage of master trusts for both members and employers alike is their so-called “flagship” status. “What we’ve seen with the rise of master trusts in the last couple of years is that successful master trusts often become ‘flagships’ for providers, so employers and members are benefiting from a best-in-class experience when it comes to innovations and additional supports offered,” O’Farrell says.
This is particularly acute when it comes to member engagement and communications, where master trusts are undoubtedly leading the way, he adds. “Member communications and support is a key facet of pension provision, but the reality is that engaging members, tackling inertia and boosting low financial literacy around pensions to help members feel confident in this space is infamously challenging,” says O’Farrell. “And yet, in this new world of pensions, it has become infinitely more important. So, it’s great to see what this renewed focus, combined with the scale of our master trust, has allowed us to achieve.”
The Irish Life Empower Master Trust now holds €8 billion – making it the largest in Ireland. Yet these advances in communication means they can now offer meaningful support to all master trust members, O’Farrell says. “Every member of the Empower Master Trust experiences a premium proposition in this space, no matter the size of their plan, or their pension pot. That’s a significant benefit both to employers and their members, and one that will likely have a dramatic impact over time.”
Master trusts now represent more than 40 per cent of the Irish defined contribution market, with significant growth in recent years. Looking ahead, White says growth is expected to continue. “Existing plans will continue consolidating into master trusts, but the sector is also likely to benefit from the launch of the upcoming auto-enrolment regime, due to commence in September next year.
“Due to a few factors, including their strong governance structure and the tax benefits they offer employees, many employers will likely consider if master trusts best meet their requirements and their employees’ needs under the auto-enrolment regime.”